EURUSD capped by 200-week MAForays above 1.10 won't be sustained: INGU.S. inflation is this week's highlight

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The Euro to Dollar exchange rate is unlikely to hold gains above 1.10 over the coming days, according to a new analysis. However, a weak U.S. inflation report on Thursday could keep the pair supported above 1.09 into the weekend.

The Euro has started 2024 on a soft footing against the Dollar as it retreats from year-end multi-month highs at 1.1139 to quote at 1.0940 at the time of writing.

The Dollar proved the best-performing major currency of the first week of the new year, bolstered by an easing in market-implied expectations for the scale of Federal Reserve rate cuts to fall in 2024, which followed a string of better-than-expected data releases.

The fundamental reassessment in Fed expectations comes as Euro-Dollar approached the 200-week moving average, which is located just below 1.1150, and appears to form a formidable barrier:

Above: EURUSD at weekly intervals.

The chart hints that significant technical resistance lies just ahead, potentially capping any notable upside potential in the Euro.

"We still see gains above 1.10 in EUR/USD as hard to sustain," says Francesco Pesole, FX Strategist at ING Bank.

Pesole says Euro-Dollar is currently driven by risk sentiment and the equity performance differential, while the correlation with short-term rate differentials waned in the latter part of 2023.

He explains that a strong case for global stock and in particular European equities outperformance would be needed to bring EUR/USD much higher.

"Incidentally, we expect a stabilisation/correction in global equity performance as opposed to the November/December action, which should allow a relinking of front-end yield spreads with EURUSD," says Pesole.

"If that happens, the euro isn’t in a favourable position, because the 2-year swap spread differential remains wide at -125bp, and some unwinding of European Central Bank (ECB) rate expectations would hardly bring the spread back to levels consistent with 1.10+ in EUR/USD," he adds.

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The Eurozone's data calendar is quiet this week, with Monday's German factory orders disappointing, while German industrial production figures for November are released on Tuesday.

Eurozone-wide economic sentiment, retail sales (due Monday) and unemployment rate (tomorrow) are due, but ING's strategists don't expect these to move the market.

ECB Governing Council members François Villeroy, Isabel Schnabel, and Philip Lane will offer commentary that could provide some interest throughout the week.

"Expect some pushback against rate cut bets, especially after the rebound in inflation in December, although markets have quite consistently 'out-doved' the ECB commentary of late," says Pesole.

Such pushback can offer the Euro some support near-term.

"We continue to see EUR/USD on unstable ground this quarter, and any positive impact from softer US data/better EZ data may be more short-lived than downside corrections. We target a return to the 1.08 mark over the course of this quarter," says Pesole.

The key economic release for Euro-Dollar will be this week's U.S. inflation release, due Thursday.

The market looks for a print of 3.2% year-on-year in December, up from November's 3.1%, driven by a monthly increase of 0.2%.

Core inflation is expected at 3.8% y/y, down from 4.0%.

The rule of thumb says should inflation beat these expectations, the Dollar will fall, with the market reaction becoming more noticeable the greater the divergence.

"On balance, we don't expect that the labour market data will be the main determinant for the Federal Reserve on policy in the next several months and this week’s release of US CPI will be much more critical," says Edward Bell, an analyst at Emirates DNB.

However, the strong U.S. jobs report out last Friday serves as a reminder that the U.S. economy is still capable of delivering above-consensus readings; therefore, Dollar strength could again well be on this week's agenda.